Severn Trent Water Limited Report and financial statements For the year ended 31 March 2019 Company number 2366686 Severn Trent Water Limited Severn Trent Centre 2 St John’s Street Coventry CV1 2LZ www.stwater.co.uk 1 Contents Strategic report What we do 3 Our business model 4 Chairman’s statement 5 Market and industry overview 7 Chief Executive’s review 10 How we are doing achieving our strategic objectives 13 ODIs and KPIs 18 Performance review 23 Financial review 39 Risk management 47 Emerging risks 48 Principal risks 50 Brexit Statement 64 Viability Statement 64 Governance Governance report 69 Board of Directors 71 Directors’ remuneration report 93 Directors’ report 98 Directors’ Responsibilities Statement 105 Group and Company financial statements Independent auditor’s report 107 Group and company income statement 116 Group and company statement of comprehensive income 117 Group statement of changes in equity 118 Company statement of changes in equity 119 Group and company balance sheet 120 Group and company cash flow statement 121 Notes to the Group and company financial statements 122 2 Severn Trent Water Limited Strategic report (continued) For the year ended 31 March 2019 Welcome to the Severn Trent Water Annual Report 2019 OUR PURPOSE IS TO SERVE OUR COMMUNITIES AND BUILD A LASTING WATER LEGACY. THIS DRIVES OUR VISION TO BE THE MOST TRUSTED WATER COMPANY BY 2020, DELIVERING AN OUTSTANDING CUSTOMER EXPERIENCE, BEST VALUE SERVICE AND ENVIRONMENTAL LEADERSHIP. This report highlights the progress we have made over the past year in achieving that vision through our strategic objectives and absolute focus on listening to and delivering value for all of our stakeholders. We’re committed to keeping your water flowing clearly and making your waste water clean again, so you can carry on enjoying this precious resource, for generations to come. What we do We provide clean water and waste water services to more than 4.5 million households and businesses through Severn Trent Water Limited and its subsidiary Hafren Dyfrdwy Cyfyngedig. The primary activities we focus on Wholesale operations and engineering Household customer services Where we operate Our region stretches across the heart of the UK, from the Bristol Channel to the Humber, and from North and mid-Wales to the East Midlands. Turnover Litres of drinking water supplied each day £1,673.1 million 2.0 billion Profit before interest and tax Litres of waste water treated per day £557.7 million 2.9 billion Underlying profit before interest and tax1 Employees £567.3 million 6,305 Households and businesses served 4.5 million 1. Alternative Performance Measures are defined in note 43 to the financial statements 3 Severn Trent Water Limited Strategic report (continued) For the year ended 31 March 2019 Our business model 4 Severn Trent Water Limited Strategic report (continued) For the year ended 31 March 2019 Chairman’s statement FULFILLING OUR ROLE IN SOCIETY “It has never been more important that we focus on our purpose in society. This underpins everything that we do. Not only in the context of our shareholders but also in full consideration of our employees, communities and other stakeholders. This isn’t only a focus for us because we are a good Company, but because it is synonymous with the long-term success of Severn Trent.” Andrew Duff Chairman This year has seen our Company successfully achieve a series of important milestones, culminating in our business plan for the five years from 2020 being fast-tracked by Ofwat. Our operational performance is discussed in detail in our Chief Executive’s statement. Here, I want take the opportunity to look at the bigger picture by highlighting the positive difference we have made for our customers and underline our commitment to being a force for good in the communities we serve. Our purpose is to serve our communities, build a lasting legacy and be recognised as the most trusted water company – and during the year we were delighted to see this commitment recognised when we were named as a pathfinder with the Purposeful Company Task Force, an initiative that seeks to transform British business with purposeful companies that are committed to creating long-term value through serving the needs of society. We were the only utility to receive this honour, and we're continuing our work with Will Hutton, Clare Chapman and likeminded companies to explore how we can best use social purpose as a tool to promote trust between business and society. This understanding and recognition of social purpose has never been more important – our purpose connects us with our customers and our communities, inspires our people and reinforces that in the long term, we all share the same interests. We believe that transforming our services and driving growth will lead to mutual benefit for all, with performance that delivers benefits to one group also delivering for others. The interests of our stakeholders such as our customers, employees and pensioners, are often interlinked. I am pleased to see that in its emerging strategy, Ofwat sees the importance of encouraging companies to deliver public value and how they can, for example, give recognition to companies to own their public purpose. Long-term achievements Water services in England and Wales have been transformed for the better over the last 25 years – and we have played a major role in this change, investing £22 billion in today’s money in infrastructure improvements over the last quarter of a century. We are proud of the part that our continuous investment has played in providing better services to our customers, greater opportunities for communities and our people and a cleaner environment for all. The future of the water industry continues to be the subject of significant debate. At Severn Trent, our policy is to only comment on political issues that materially affect our customers. We believe that renationalisation is one such issue, and that the interests of all stakeholders – including UK taxpayers – are best served by the industry remaining privatised whilst operating within a clear and robust regulatory framework. 5 Severn Trent Water Limited Strategic report (continued) For the year ended 31 March 2019 Our people make the difference Our people take very seriously the responsibility that comes with providing an essential service that touches the lives of millions. Their passion and commitment shines through in everything they do – meeting customers, solving problems and working tirelessly to keep our product flowing at the turn of a tap, 24 hours a day, seven days a week – and on behalf of the Board I thank them unreservedly. It is important that the makeup of our workforce is representative of the communities we serve. I am pleased to report that in respect of ethnic diversity, 8.7% of our workforce come from Black, Asian and Minority Ethnic (‘BAME’) backgrounds. Additionally, 31% of our graduates and 12% of our apprentices come from BAME backgrounds, significantly above industry averages. We’ve also invested in initiatives to help provide employment opportunities to people from disadvantaged backgrounds in our region. And we are also the highest ranked utility in the Hampton-Alexander report, which measures gender equality. Sharing the rewards Under our industry’s regulatory framework, high levels of customer service create financial rewards through ODI outperformance. This means that we are able to share the benefits of our work with all stakeholders when we perform well. Over the course of the AMP we will reinvest £220m generated by our outperformance back into our business. Additionally, our new community dividend will set aside 1% of company profits for the benefit of community schemes. Your Board There were no changes to Board membership during the year. We continued to work well together as a team, with the appropriate balance of Executive and Non-Executive Directors. The Board was fully engaged throughout the PR19 process; and worked tirelessly with our senior team to create a plan that will bring real improvements to customer service while also keeping bills the lowest in England and Wales. It is a real privilege to serve as Chairman of Severn Trent and it has been a pleasure to oversee the Company’s progress over the last nine years. As we prepare to implement our new business plan, following selection as one of only three companies awarded Fast Track status by Ofwat, I believe this is the right moment to step down and allow a new Chair to lead the Board into this important next phase for Severn Trent. These plans are in the early stages and it is planned to formally announce my successor in due course. You can read more on this process on page 91. Outlook Ofwat's fast-tracking of our business plan has, in many ways, endorsed our strategy, structure and business model, and further fuelled our commitment to customer service. I look forward to the year ahead with confidence, knowing that the talent of our people, the financial strengths of our business, and our commitment to good governance will help us to fulfil our potential as a socially responsible business providing a high quality, essential public service. Andrew Duff Chairman 6 Severn Trent Water Limited Strategic report (continued) For the year ended 31 March 2019 Market and industry overview Our context and peers A total of 17 regional businesses supply water services to over 50 million household and non- household customers in England and Wales. Eleven of these, including Severn Trent Water Limited and Hafren Dyfrdwy Cyfyngedig, provide waste water services, the remaining six provide water only. The history of the water sector Water services in England and Wales have been transformed since the early 1900s.